Chapter 7 is the traditional bankruptcy everyone thinks about. Chapter 7 eliminates – discharges – all of your unsecured debts. By unsecured debts, we mean credit cards, medical bills, deficiencies – amounts remaining due – on vehicles that have already been repossessed, etc. Secured debts include vehicle loans and home loans – or any other loan where the lender has the right to repossess the property. Secured debts may be included in a chapter 7, but if you want to keep the property, you will have to bring the loan current and continue paying on the loan. Otherwise, you will have to surrender the property. Another option is to “redeem” the secured property – this means to pay for it in full at a reduced amount agreed to by the secured creditor. Not everyone is eligible to file a Chapter 7 bankruptcy. There are income limitations based on your household size. Your attorney will be able to advise you on the specifics.
A Chapter 13 bankruptcy can be considered more of a financial reorganization. Using a Chapter 13, a person can pay off arrears and secured debts through the court system by payments to the bankruptcy trustee. In a Chapter 13, a payment plan is set up whereby the debtor makes a monthly payment to the trustee and the trustee pays off the secured debt and a portion of the unsecured debts. Depending on your income, sometimes all of the debts are paid off in a Chapter 13. However, usually only a portion of the unsecured debts are paid – sometimes pennies-on-the-dollar. Everyone’s situation is different. Please don’t make the mistake of relying on advice from your friends, because their situation is guaranteed to be different from yours.
A Chapter 13 is much more complicated than a Chapter 7. To be successful in a Chapter 13, you must have a regular income and be able to make regular monthly payments. The monthly payments will be based on your ability to pay. An experienced bankruptcy attorney can save you a lot of money in a Chapter 13. Some say it is more of an art than a science.